The Delaware Supreme Court recently held that the dismissal of a shareholder derivative suit by a California federal court had a preclusive effect on a substantially similar suit pending in the Delaware Chancery Court against the same defendants. The decision strengthens the defense of collateral estoppel in multijurisdiction derivative litigations.

In September 2010, Allergan, Inc. entered into a settlement with the Department of Justice concerning the improper marketing of BOTOX. Shortly thereafter, shareholders filed derivative actions in the Delaware Chancery Court and a California federal court. The California court dismissed the action with prejudice for failure to plead demand futility under Rule 23.1. The defendants subsequently moved to dismiss the Delaware action on the basis of collateral estoppel. The Chancery Court denied defendants’ motion to dismiss. The Chancery Court invoked the internal affairs doctrine and applied Delaware law, finding that the plaintiffs in the two jurisdictions were not in privity. As an alternative basis for dismissal, the Chancery Court found that the California shareholders were not adequate representatives of the corporation.

The Supreme Court reversed because the Chancery Court’s decision “conflated collateral estoppel with demand futility.” It held that once a court of competent jurisdiction has issued a final judgment, a “successive case is governed by the principles of collateral estoppel, under the full faith and credit doctrine, and not by demand futility law, under the internal affairs doctrine.” The Court opined that “the undisputed interest that Delaware has in governing the internal affairs of its corporations must yield to the stronger national interests that all state and federal courts have in respecting each other judgments.” Applying California law and federal common law, the Court held that the federal judgment satisfied all elements of collateral estoppel.

The Court further rejected the Chancery Court’s finding that the California plaintiffs were inadequate representatives because they filed suit before pursuing a books and records investigation. The Court rejected the “‘fast filer’ irrebuttable presumption of inadequacy,” finding that there was “no record support for the trial court’s premise that stockholders who file quickly . . . are a priori acting on behalf of their law firms instead of the corporation.” Although the Court shared the Chancery Court’s concern about fast filers, it cautioned that “remedies for the problems [that fast filers] create should be directed at the lawyers, not the stockholder plaintiffs or their complaints.”

Pyott v. Louisiana Municipal Police Employees’ Retirement System, No. 380, 2012 (Del. April 4, 2013).